In The United States Court of Appeals For the Fourth Circuit

Transcription

1 Case: Document: 18 Date Filed: 11/15/2010 Page: 1 NO In The United States Court of Appeals For the Fourth Circuit JOHN BEHRMANN, NANCY BEHRMANN, HIGHBOURNE FOUNDATION, DELORES F. ANDERSON and THE DODIE ANDERSON FOUNDATION, v. NATIONAL HERITAGE FOUNDATION, INC., Appellants, Appellee. ON PETITION FOR REVIEW OF AN ORDER OF: The United States District Court For the Eastern District of Virginia, Alexandria Division The Honorable Claude M. Hilton District Court Case No. 1:10cv40 APPELLANTS OPENING BRIEF Respectfully submitted, Gregory H. Counts Glenn W. Merrick TYLER, BARTL, RAMSDELL & G.W. MERRICK & ASSOCIATES, LLC COUNTS, P.L.C DTC Parkway, Suite N. Washington St., Suite 202 Greenwood Village, Colorado Alexandria, Virginia Telephone: (303) Telephone: (703) Facsimile: (303) Facsimile: (703) gwm@gwmerrick.com gcounts@tbrclaw.com i

2 Case: Document: 18 Date Filed: 11/15/2010 Page: 2 CORPORATE DISCLOSURE STATEMENT Pursuant to Fed.R.App.P and Local Rule 26.1, Appellants, John Behrmann, Nancy Behrmann, Highbourne Foundation, Dolores F. Anderson and The Dodie Anderson Foundation, make the following mandatory disclosures: 1. None of the Appellants is a publicly held corporation or other publicly held entity. 2. None of the Appellants is owned by a parent corporation. 3. None of the stock of the Appellants is owned by a publicly traded corporation or publicly held entity. 4. None of the Appellants is a trade association. 5. This case arises out of a chapter 11 bankruptcy proceeding, In re National Heritage Foundation, Inc., Case No SSM in the United States Bankruptcy Court for the Eastern District of Virginia. s/ Glenn W. Merrick Glenn W. Merrick Attorney for Appellants ii

3 Case: Document: 18 Date Filed: 11/15/2010 Page: 3 TABLE OF CONTENTS TABLE OF AUTHORITIES v-viii STATEMENT RESPECTING JURISDICTION 1 A. District Court Jurisdiction B. Court of Appeals Jurisdiction C. Timeliness of Appeal STATEMENT OF ISSUES PRESENTED FOR REVIEW STATEMENT CONCERNING CITATIONS TO THE RECORD STATEMENT OF THE CASE STATEMENT OF FACTS A. Background Facts B. The NHF Reorganization Plan NHF s Fourth Amended Plan The Confirmation Hearing Further Amendment to NHF s Fourth Amended Plan Confirmation of NHF s Fourth Amended Plan and Appeal 12 SUMMARY OF ARGUMENT ARGUMENT I. Standard of Review II. The District Court Erred in Holding That NHF s Plan Satisfies Statutory Confirmation Criteria Established by Congress iii

4 Case: Document: 18 Date Filed: 11/15/2010 Page: 4 A. The Statutory Confirmation Criteria U.S.C. 1129(a)(3) U.S.C. 1129(a)(1) B. The Very Narrow Exception for Limited Third-Party Releases This Court s Decision in Menard-Sanford Decisions from Other Circuits The Dow Corning Criteria a. NHF Did Not Prove That Suit Will Deplete the Assets of the Debtor b. The Non-Debtors Have Not Contributed Substantial Assets to the Reorganization c. The Injunction is Not Essential to Reorganization.. 23 d. The Impacted Class Has Not Voted Overwhelmingly to Accept the Plan e. The Plan Does Not Provide a Mechanism to Pay All Members of the Affected Class f. The Plan Does Not Provide an Opportunity for Those Claimants Who Choose Not to Settle to Recover in Full g. Neither the District Court Nor the Bankruptcy Court Made a Record of Specific Findings to Support its Conclusions CONCLUSION REQUEST FOR ORAL ARGUMENT iv

5 Case: Document: 18 Date Filed: 11/15/2010 Page: 5 CERTIFICATE OF COMPLIANCE WITH TYPE-VOLUME LIMITATIONS, TYPEFACE REQUIREMENTS AND TYPE STYLE REQUIREMENT CERTIFICATE OF SERVICE TABLE OF AUTHORITIES Cases Page A.H. Robins Co. v. Piccinin (In re A.H. Robins Co., Inc.), 784 F.2d 994, 1003) (4 th Cir. 1986) A.T. Massey Coal Co. v. Harman Dev. Corp. (In re Sovereign Coal Sales, Inc.), 2000 Bankr. LEXIS 2092, * (Bankr. W.D. Va. 2000) 22 Alradigm Communications, Inc. v. FCC (In re Alradigm Communications, Inc.), 519 F.3d 640, 657 (7 th Cir. 2008) In re Banks, 299 F.3d 296, 300 (4 th Cir. 2002) Barnhill v. Johnson, 503 U.S. 393, 401 (1992) In re Berwick Black Cattle Co., 394 Bankr. 448, (Bankr. C.D. Ill. 2008) In re Byrd Foods, Inc., 253 Bankr. 196, 199 (Bankr. E.D. Va. 2000) In re Carlton, 186 Bankr. 644, 648 (Bankr. E.D. Va. 1994) Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d 648, 658 (6 th Cir.), cert denied, 537 U.S. 816 (2002).. 20, 21, 25, 26 In re Combustion Eng g, Inc., 391 F.3d 190, (3 rd Cir. 2004) Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136, 142 (2 nd Cir. 2005)... 19, 20, 23 v

6 Case: Document: 18 Date Filed: 11/15/2010 Page: 6 In re Johns-Manville Corp. v. Chubb Indem. Ins. Co. (In re Johns- Manville Corp.), 517 F.3d 52, 66 (2 nd Cir. 2008), rev d on other grounds sub nom. Travelers Indem. Co. v. Bailey, 129 S.Ct (2009) In re Kielisch, 258 F.3d 315, 319 (4 th Cir. 2001) Land Stewards, L.C. v. Pleasants Inc. IV, Lt. Ptship. (In re Land Stewards, L.C.), 2002 Bankr. LEXIS 1748, * 9 (Bankr. E.D. Va. July 23, 2002) Menard-Sanford v. Mabey (In re A.H. Robins Co., Inc.), 880 F.2d 694, (4 th Cir.), cert. denied, 493 U.S. 959 (1989) , 17, 18, 19, 20 In re Mercedes Homes, Inc., 2009 Bankr. LEXIS 4265, **24-38 (Bankr. S.D. Fla. 2009) N.L.R.B. v. Bildisco & Bildisco, 465 U.S. 513, 527 (1984) Northwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988) In re Original IFPC Shareholders, Inc., 317 Bankr. 738, 747 (Bankr. N.D. Ill. 2004) Patterson v. Shumate, 504 U.S. 753, (1992) Republic Supply Co. v. Shoaf, 815 F.2d 1046, 1050 (5 th Cir. 1987) In re Schwarzmann, 203 Bankr. 919, 923 (Bankr. E.D. Va. 1995) Stuart v. First Mount Vernon Indus. Loan Ass n., 3 Fed Appx. 38, 42 (4 th Cir. 2001) Toibb v. Radloff, 501 U.S. 157, 162 (1991) In re Transit Group, Inc., 286 Bankr. 811, 815 (Bankr. M.D. Fla. 2002) 20, 23 Union Bank v. Wolas, 502 U.S. 151, 158 (1991) United States v. Ron Pair Enterprises, 489 U.S. 235, 241 (1989) vi

7 Case: Document: 18 Date Filed: 11/15/2010 Page: 7 In re U.S. Airways Group, Inc., 2003 Bankr. LEXIS 2207 at * (Bankr. E.D. Va. March 18, 2003) , 17 In re Walker, 165 Bankr. 994, (E.D. Va. 1994) Rules and Statutes Page 28 U.S.C. 158(a) Fed.R.Bankr.P. 8001(e) Fed.R.Bankr.P U.S.C , 14, 16, U.S.C. 158(d) Fed.R.App.P. 4(a) Fed.R.App.P U.S.C. 101(5) U.S.C , U.S.C , 15, 16, 17, U.S.C. 105(a) U.S.C. 1123(b) U.S.C. 1123(a) U.S.C. 1126(f) Fed.R.App.P Local Rule 34(a) vii

8 Case: Document: 18 Date Filed: 11/15/2010 Page: 8 Fed.R.App.P Fed.R.App.P viii

9 Case: Document: 18 Date Filed: 11/15/2010 Page: 9 STATEMENT RESPECTING JURISDICTION A. District Court Jurisdiction The District Court s Jurisdiction is based upon 28 U.S.C. 158(a)(1) and Fed.R.Bankr.P. 8001(e). The United States Bankruptcy Court for the Eastern District of Virginia (the Bankruptcy Court ) entered its Findings of Fact, Conclusions of Law and Order under 11 U.S.C. 1129(a) and Fed.R.Bankr.P Confirming the Fourth Amended and Restated Plan of Reorganization of the Debtor (Jt. App. at 872) (the Confirmation Order ) on October 16, B. Court of Appeals Jurisdiction This Court s jurisdiction is based upon 28 U.S.C. 158(d)(1) because this is an appeal from a final judgment entered on August 17, 2010 (Jt. App. at 1146) of the United States District Court for the Eastern District of Virginia (the District Court ) affirming the Confirmation Order referred to above. C. Timeliness of Appeal Final judgment was entered by the District Court affirming the Confirmation Order on August 17, Jt. Appx. at Appellants Notice of Appeal was filed on August 31, Jt. Appx. at This appeal is timely pursuant to Fed.R.App.P. 4(a)(1). 1

10 Case: Document: 18 Date Filed: 11/15/2010 Page: 10 STATEMENT OF ISSUES PRESENTED FOR REVIEW Whether the District Court erred in its August 17, 2010 Order by affirming the Confirmation Order entered by the Bankruptcy Court on October 16, STATEMENT CONCERNING CITATIONS TO THE RECORD Citations made herein to the record refer to the Joint Appendix (Jt. Appx. at ) and Appellants Appendix 1 (Aplt. Appx. at ), both filed with this Court contemporaneously herewith pursuant to Fed.R.App.P. 30. STATEMENT OF THE CASE This is an appeal of the August 17, 2010 Order entered by the District Court affirming the Bankruptcy Court s Confirmation Order which confirmed, over Appellants objections, the Fourth Amended and Restated Plan of Reorganization of the Debtor (the Plan ), as further amended and proposed by the Debtor, National Heritage Foundation, Inc. Specifically, this appeal concerns whether the District Court erred by affirming the Bankruptcy Court s confirmation of the Plan without excising provisions that extend non-debtor (third-party) releases more broadly than has ever been approved by any appellate court in the United States. 1 Appellants Appendix contains those materials that Appellee, National Heritage Foundation, Inc., disagreed to include in the Joint Appendix. 2

11 Case: Document: 18 Date Filed: 11/15/2010 Page: 11 STATEMENT OF FACTS A. Background Facts The Debtor, National Heritage Foundation, Inc. ( NHF ) is a Georgia corporation that at all material times has held itself out as a non-profit public charity exempt from federal income tax. NHF asserted publicly that it assists the progress of scientific, charitable, educational and religious activities by consolidating and centralizing the administration of charitable donations and projects. Jt. Appx. at 488. Appellants are all the holders of substantial claims against the NHF bankruptcy estate. 2 The claims arise out of NHF s encouragement, inducement and solicitation of the Behrmanns and Ms. Anderson to: (i) establish donor-advised funds under the supervision of NHF (the DAFs ), and (ii) contribute millions of dollars to fund those DAFs for future donation to worthy charitable organizations 2 Appellants John R. Berhmann, Nancy Behrmann and the Highbourne Foundation filed their claim on May 20, 2009 in the amount of $649,138 (Claim No. 142). Jt. Appx. at Appellants Dolores F. Anderson and the Dodi Anderson Foundation (collectively, Anderson ), filed their claim on October 6, 2009 in the amount of $1,010,796 (Claim No. 341). Jt. Appx. at NHF lodged an objection to Anderson s claim as having been filed untimely (the bar date having been June 3, 2009), and on November 19, 2009, the Bankruptcy Court entered a final Order denying Anderson s Motion for Leave to File Proof of Claim Out of Time, and accordingly disallowed Anderson s claim as untimely. The District Court affirmed. Anderson has appealed the District Court s decision to this Court. Anderson, et al. v. National Heritage Foundation, Inc., Case No (the Anderson Appeal ). Anderson is included in the captioned appeal to preserve Anderson s rights to contest confirmation of NHF s Reorganization Plan upon reversal in the Anderson Appeal. 3

12 Case: Document: 18 Date Filed: 11/15/2010 Page: 12 and causes identified by the Behrmanns and Ms. Anderson. Jt. Appx. at 1240, Both prior and subsequent to the establishment of these DAFs, and the follow on contributions, NHF (through the Houk family that at all material times controlled NHF): (i) published to the Behrmanns and Ms. Anderson -- via mailings and other communications -- numerous material misrepresentations, and (ii) consciously concealed from the Behrmanns and Ms. Anderson crucial facts and matters that in equity and good conscience should have been disclosed so as to make the matters that were represented to them not materially misleading. Id. Specifically, the material misrepresentations and omissions that were employed by NHF (through the Houk family controlling NHF) to induce the Behrmanns and Ms. Anderson to establish their DAFs, and to make substantial transfers of funds and property to the DAFs, included without limitation: a. NHF failed to fully and timely disclose that NHF s founder, John T. Houk II ( Houk ), had initiated the original National Heritage Foundation in 1968, and that in 1982, the IRS filed suit to revoke the original entity s charitable status for violations of federal tax laws. Houk was then ousted as the CEO of the original entity, which changed its name to National Heritage Foundation, Inc. Id. b. NHF failed to fully and timely disclose that Houk started the current National Heritage Foundation, Inc. (Appellee in this case) in 1993, and that 4

13 Case: Document: 18 Date Filed: 11/15/2010 Page: 13 since then NHF has frequently been engaged in intense battles with the IRS in respect of the legitimacy of its practices as a charitable organization. Id. c. NHF failed to fully and timely disclose that NHF was being operated much like a family business for the Houk family. For instance, Houk is NHF s chief executive, and on NHF s payroll are his wife, Marian M. Houk (Chief Operating Officer), his son, John T. Houk III (President), his daughter (Vice President) and his daughter-in-law, Julie Houk (Vice President). In 2007, for instance, the Houk family members were collectively paid approximately $372,000 by NHF and its affiliates. Id. d. NHF failed to fully and timely disclose that NHF was engaged in business transactions with business entities in which Houk held a direct or indirect interest. For example, NHF paid rent in respect of a building owned by Houk, lent money to Charity Admin, a for-profit Houk family firm (which was subsequently written off) and later purchased services from To the Point, yet another Houk family business. Id. e. NHF failed to fully and timely disclose that the Houk family officers of NHF were (and are) confronted with material, undisclosed conflicts of interest during the course of performing their duties for NHF. Id. f. NHF failed to fully and timely disclose that NHF engaged in highly dubious business activities. For instance, NHF extended $14 million in 5

14 Case: Document: 18 Date Filed: 11/15/2010 Page: 14 unsecured loans (that are now in default) to a non-public company run by an individual who served as an unlicensed investment advisor to NHF. Id. g. NHF failed to fully and timely disclose that NHF engaged in highly imprudent and improper business and investment practices, and that it published financial statements that were materially false and misleading. Id. h. NHF failed to fully and timely disclose that NHF had failed to establish, implement and monitor appropriate and prudent measures to prevent material, unauthorized payments to its employees. Id. i. NHF affirmatively published and represented that the transfers of funds and property effected to the Behrmanns and Ms. Anderson to their respective DAFs would be used for exclusively charitable purposes (for which the Behrmanns and Ms. Anderson would have exclusive advisory input). NHF failed to disclose, however, that some or all of the Behrmanns and Ms. Anderson s transferred funds and property would be used as collateral to secure NHF s indebtedness to third-party banks and/or would be used to pay NHF s indebtedness to third-parties. Id. j. NHF affirmatively published and represented to Ms. Anderson that the management of the funds and property she transferred to NHF s control would remain exclusively in the possession of Greenwood Capital, and that the 6

15 Case: Document: 18 Date Filed: 11/15/2010 Page: 15 only role of NHF would be to draw checks in respect of charitable contributions that Anderson desired to make. Id. Reasonably relying upon these material misrepresentations (and remaining ignorant of the material omissions), the Behrmanns established Highbourne Foundation, and Ms. Anderson established the Dodie Anderson Foundation, as DAFs under the supervision of NHF. Id. The Behrmanns and Ms. Anderson then transferred to those DAFs, and to NHF s supervision, millions of collars of funds and property. Id. On January 24, 2009, NHF filed a voluntary petition in the Bankruptcy Court seeking to reorganize under chapter 11 of the Bankruptcy Code. Thereafter, on or about June 30, 2009, NHF (at the direction of the Houk family that continued to control NHF) confiscated approximately $1.75 million in funds and property then on hand with Highbourne Foundation and the Dodie Anderson Foundation. Those funds and properties were transferred into NHF s general operating account, and were then redirected to pay one of NHF s third-party bank lenders in partial satisfaction of NHF s debt. Id. Notably, prior to this event the funds and property transferred by the Behrmanns and Ms. Anderson to their respective DAFs had been consistently donated to charitable organizations and causes consistent with the Behrmanns and Ms. Anderson s expressed directions. The confiscation by NHF (at the direction of the Houk family) in the summer of 2009 robbed the remaining 7

16 Case: Document: 18 Date Filed: 11/15/2010 Page: 16 funds and properties of being used for the charitable purposes for which they had been expressly intended. Id. Accordingly, Appellants filed claims in the NHF reorganization proceedings 3. B. The NHF Reorganization Plan On September 4, 2009, NHF filed a proposed Third Amended and Restated Plan of Reorganization (the Debtor s Third Amended Plan ), and an accompanying Third Amended and Restated Disclosure Statement (the Disclosure Statement ). Jt. Appx. at 484. On September 8, 2009, the Behrmanns filed timely objections challenging the adequacy of the Disclosure Statement (Jt. Appx. at 581), and broadly challenging the confirmation of the Debtor s Third Amended Plan. Among other things, these objections challenge the release and exculpation provisions contained in the Debtor s Third Amended Plan. Jt. Appx. at These provisions improperly extend comprehensive clemency designed to protect the Houk family from liability for their wrongful, tortuous pre-petition and post-petition misconduct. Anderson asserted similar timely objections to 3 See note 2, supra. NHF objected to the Behrmann s claim, and moved to dismiss that claim. On February 19, 2010, the Bankruptcy Court (Judge Stephen Mitchell) entered an oral ruling denying NHF s Motion to Dismiss. Judge Mitchell determined that the Behrmanns have stated a claim for rescission under 11 U.S. C. 101(5) because inherent in NHF s sponsorship of DAFs is an implied representation and assurance that the contributions would be used for charitable purposes, and would not be confiscated to pay the general obligations of NHF. Aplt. Appx. at 47. 8

17 Case: Document: 18 Date Filed: 11/15/2010 Page: 17 adequacy of the Disclosure Statement and to the confirmation of the Third Amended Plan 4. Jt. Appx. at 607, NHF s Fourth Amended Plan. On October 12, three days prior to the scheduled combined hearing before the Bankruptcy Court on the adequacy of the Disclosure Statement and the confirmation of the Debtor s Third Amended Plan -- NHF filed its Fourth Amended Plan. 5 Jt. Appx. at 613. In this latest version of a reorganization plan, NHF sought to remedy some of Appellants objections to the adequacy of the Disclosure Statement and to the confirmation of the NHF s Third Amended Plan. A handful of observations respecting NHF s Fourth Amended Plan are crucial. First, it must be observed that NHF s Fourth Amended Plan provides for full (100%) payment of all allowed claims on the plan s Effective Date without any contribution of money or property from any of the Debtor s directors and officers, including the members of the Houk family. Jt. Appx. at Thus, continuation of NHF s operations is not required for a successful reorganization 4 Appellants specifically challenged the release, injunction and exculpation provisions afforded the Houk family under Sections 7.19, 7.20 and 7.21 of the Debtor s Third Amended Plan (Jt. Appx ), and joined in a similar objection to these provisions filed by the Office of the United States Trustee. Id. 5 No new or amended chapter 11 disclosure statement was ever filed or served to disclose or discuss the changes effected in NHF s Fourth Amended Reorganization Plan. 9

18 Case: Document: 18 Date Filed: 11/15/2010 Page: 18 under this plan. Second, NHF s Fourth Amended Plan modified the earlier version of the plan by including a new class of creditors, Class 3C. Class 3C consists of those creditors who established DAFs and filed claims against NHF in the bankruptcy proceedings, and the Fourth Amended Plan treats this new class as unimpaired under 11 U.S.C Jt. Appx. at 620, 624. Third, the challenged release and exculpation provisions, and the corresponding injunction provision (Section 7.20 of the Plan) were continued into the latest version of NHF s Plan. Jt. Appx. at Finally, it is significant that under NHF s Fourth Amended Plan none of the beneficiaries of the release, exculpation and injunction provisions are required to make any financial contribution to NHF or to fund its reorganization Plan. Jt. Appx. at The Confirmation Hearing. On October 15, 2009, the Bankruptcy Court conducted a hearing respecting the adequacy of the Disclosure Statement and confirmation of Debtor s Fourth Amended Plan 6. Jt. Appx. at During the examination by NHF s counsel, Janet Ridgely, one of the Houk family 6 Indeed, when the hearing commenced Appellants counsel had not yet received a copy of the Debtor s Fourth Amended Plan. Jt. Appx. at Appellants counsel continued to object to the release and exculpation provisions continued into the Debtor s Fourth Amended Plan (Jt. Appx. at 1277) and requested that that the hearing be continued to permit a review of the Plan. The Bankruptcy Court directed Appellants counsel to review the revised reorganization plan over the lunch hour. Jt. Appx. at

19 Case: Document: 18 Date Filed: 11/15/2010 Page: 19 members 7 and the only person to testify at the confirmation hearing, testified that the release, injunction and exculpation provisions had been inserted into NHF s reorganization plans because the Houk family members were concerned that those who had established DAFs (such as Appellants) might pursue litigation against the family. Jt. Appx. at However, upon cross-examination, Ms. Ridgely acknowledged that none of the NHF directors and officers -- including the Houk family members -- has ever indicated that he or she would decline to serve as a director or officer of NHF if the release/injunction/exculpation provisions were not included in NHF s reorganization plan. Jt. Appx. at As a result of the cross-examination by Appellants counsel of Ms. Ridgely (particularly testing the release, injunction and exculpation provisions contained in Sections 7.19, 7.20 and 7.21 of NHF s Fourth Amended Plan), Bankruptcy Judge Stephen Mitchell declined to confirm NHF s Fourth Amended Plan as it existed on October 15, Instead, he instructed NHF s counsel to submit a proposed Confirmation Order that would strike the broad release, injunction and exculpation provisions, or that would narrow them materially. Jt. Appx. at Further Amendment to NHF s Fourth Amended Plan. The following day, October 16, 2009, NHF s counsel filed an Exhibit modifying Sections 7.19, 7.20 and 7.21 of the Debtor s Fourth Amended Plan. Jt. Appx. at 868. Notably, 7 Ms. Ridgely is the daughter of J.T. Houk II, the founder and Chairman of NHF. Jt. Appx. at

20 Case: Document: 18 Date Filed: 11/15/2010 Page: 20 the revised language continues to include the release, exculpation and injunction provisions for the benefit of NHF s officers, directors, employees and designated representatives. 8 That same day, Bankruptcy Judge Mitchell entertained further argument on NHF s Fourth Amended Plan, as amended by the new Exhibit filed that morning, as well as NHF s proposed Confirmation Order. At the continued hearing, Appellants counsel renewed the objections to the release, exculpation and injunction provisions contained in Sections 7.19, 7.20 and 7.21 of the Debtor s Fourth Amended Reorganization Plan, as amended. Jt. Appx. at Confirmation of NHF s Fourth Amended Plan and Appeal. Following argument on October 16, 2009, Bankruptcy Judge Mitchell described the thirdparty release language as problematic, and recognized that third-party releases are disfavored and not routinely granted. Jt. Appx. at Nevertheless, describing this as a close case, Judge Mitchell determined to overrule Appellants continuing objections, and confirmed NHF s Fourth Amended Reorganization Plan, as amended by the Exhibit filed that morning. Jt. Appx. at , 907. On October 18, 2009, the Court entered its written Order confirming the Plan (the Confirmation Order ). Jt. Appx. at The amending exhibit does not identify NHF s designated representatives or inform the reader how, when or by whom such designation may be made. 12

21 Case: Document: 18 Date Filed: 11/15/2010 Page: 21 On October 23, 2009, Appellants timely filed a Notice of Appeal seeking the District Court s review of the Confirmation Order. Jt. Appx. at On August 17, 2010, the District Court (Senior District Judge Claude M. Hilton) entered a one-page Order affirming the Bankruptcy Court s Confirmation Order. Jt. Appx. at Appellants timely filed an appeal to this Court. Jt. Appx. at SUMMARY OF ARGUMENT The District Court s Order affirming the confirmation of NHF s Plan must be reversed for two reasons. First, the District Court erred in holding that NHF s reorganization plans satisfy the statutory criteria for confirmation established by Congress and contained in Title 11, U.S.C. Second, the District Court erred in affirming the extremely broad -- indeed, unprecedented -- third-party release and exculpatory provisions contained in the Plan. ARGUMENT I. Standard of Review This Court reviews de novo the legal conclusions of the District Court in its capacity as an appellate court reviewing a bankruptcy court s judgment, and reviews the factual findings of the lower court under the clearly erroneous standard. In re Banks, 299 F.3d 296, 300 (4 th Cir. 2002), rev d on other grounds, 130 S.Ct (2010); In re Kielisch, 258 F.3d 315, 319 (4 th Cir. 2001). Here, the District Court s determinations respecting whether NHF s Plan satisfies statutory 13

22 Case: Document: 18 Date Filed: 11/15/2010 Page: 22 confirmation criteria established by Congress, and whether the Plan s broad thirdparty release and exculpatory provisions are statutorily permissible, are both legal conclusions that are reviewed by this Court de novo. II. The District Court Erred in Holding That NHF s Plan Satisfies Statutory Confirmation Criteria Established by Congress A. The Statutory Confirmation Criteria Confirmation of a chapter 11 plan of reorganization requires that the plan proponent demonstrate full satisfaction of all of the confirmation criteria set forth in 11 U.S.C. 1129(a). In re U.S. Airways Group, Inc., 2003 Bankr. LEXIS 2207 at *12 (Bankr. E.D. Va. March 18, 2003); In re Schwarzmann, 203 Bankr. 919, 923 (Bankr. E.D. Va. 1995); In re Carlton, 186 Bankr. 644, 648 (Bankr. E.D. Va. 1994). The burden of demonstrating satisfaction of all of these statutory criteria rests squarely upon the plan proponent (which in the present case is NHF). In re U.S. Airways Group, Inc., 2003 Bankr. LEXIS 2207 at *12; In re Byrd Foods, Inc., 253 Bankr. 196, 199 (Bankr. E.D. Va. 2000). In the present case, the confirmation of NHF s chapter 11 Plan was error (and, accordingly, affirming the confirmation of the Plan was also error) because the Plan here conflicts with Section 524(e) of the Bankruptcy Code more profoundly than any reported appellate decision has ever sanctioned. 14

23 Case: Document: 18 Date Filed: 11/15/2010 Page: 23 NHF s Fourth Amended Plan, as amended, is non-confirmable based upon the inclusion of the release, exculpation and injunction provisions (in Sections 7.19, 7.20 and 7.21). These provisions provide an unconditional and unlimited shield for NHF s directors and officers (more particularly, the Houk family) from liability, and they vivisect 11 U.S.C. 524(e). That Congressional mandate provides, in pertinent part: discharge of a debt of the debtor does not affect the liability of any other entity on,, such debt (emphasis supplied). 9 And, of course, 11 U.S.C. 105(a) is not available to supersede Section 524(e) on equitable grounds because whatever equitable powers remain in the bankruptcy courts [under 11 U.S.C. 105(a)] must and can only be exercised within the confines of the [text of] the Bankruptcy Code. Northwest Bank Worthington v. Ahlers, 485 U.S. 197, 206 (1988). Section 105(a) cannot be used to achieve a result that is inconsistent with another provision of the Bankruptcy Code. In re Combustion Eng g, Inc., 391 F.3d 190, (3d Cir. 2004) (Section 105(a) cannot be used to circumvent the requirements for a channeling injunction set forth in 11 U.S.C. 524(g)). 9 Perhaps more than in any other single context -- in the context of the Bankruptcy Code the United States Supreme Court has repeatedly rebuked the lower courts for expedient constructions that conflict with the plain text of the statute. E.g., United States v. Ron Pair Enterprises, 489 U.S. 235, 241 (1989). Accord, Patterson v. Shumate, 504 U.S. 753, (1992); Barnhill v. Johnson, 503 U.S. 393, 401 (1992); Union Bank v. Wolas, 502 U.S. 151, 158 (1991); Toibb v. Radloff, 501 U.S. 157, 162 (1991). 15

24 Case: Document: 18 Date Filed: 11/15/2010 Page: U.S.C. 1129(a)(3). In order for a chapter 11 plan to be confirmed, it must be proposed in good faith and not by any means forbidden by law. 11 U.S.C. 1129(a)(3). The Court instructed in In re Walker, 165 Bankr. 994, (E.D.Va. 1994): The good faith provision of 11 U.S.C. 1129(a)(3) is designed to prevent abuse of the bankruptcy laws [Citations omitted]. The overriding standard for good faith within the meaning of 11 U.S.C. 1129(a)(3) is whether there is a reasonable likelihood that the plan will achieve a result consistent with the standards prescribed under the Code. [Citations omitted]. Id. at Appellants vigorously challenge the good faith of NHF s Fourth Amended Plan, and its proponent, the Houk family. The Plan evidences a concentrated effort by the Houk family to extend to itself comprehensive clemency -- for the family s collective benefit and profit -- in respect of reprehensible and tortious practices. More particularly, central to the NHF s fraudulent business scheme was the solicitation of contributions to DAFs based upon material misrepresentations and omissions described above. Bankruptcy courts are courts of equity, N.L.R.B. v. Bildisco & Bildisco, 456 U.S. 513, 527 (1984); Menard- Sanford v. Mabey (In re A.H. Robins Co., Inc.), 880 F.2d 694, 701 (4 th Cir.), cert. denied, 493 U.S. 959 (1989), and manifestly exoneration of a non-debtor for orchestrating and directing such practices is not consistent with the standards prescribed in the Code. In fact, it flatly contradicts those standards as reflected in Section 524(e). 16

25 Case: Document: 18 Date Filed: 11/15/2010 Page: U.S.C. 1129(a)(1). Section 1129(a)(1) of the Bankruptcy Code ensures that reorganization plans cannot be confirmed unless they comply with all applicable provisions of the Bankruptcy Code. In re U.S. Airways Group, Inc., 2003 Bankr. LEXIS 2207 at ** In this case, NHF s Fourth Amended Plan, as amended, should not have been confirmed with the broad release, exculpation and injunction benefitting non-debtor third parties included. These provisions war with 11 U.S.C. 524(e) and 1123(b)(6). 10 B. The Very Narrow Exception for Limited Third-Party Releases The propriety of including third party releases as a component of chapter 11 reorganization plans has been addressed in several circuit decisions. 1. This Court s Decision in Menard-Sanford. Third-party releases were addressed -- in the form of a channeling injunctions not present in this case -- by this Court in Menard-Sanford. That case involved reorganization necessitated by mass tort suits arising from use of the Dalkon Shield IUD. The channeling injunction in that case required that the claimants assert their tort claims against a massive trust fund established with $350 million contributed by the Debtor s insurers. Although the Fourth Circuit approved the channeling 10 Section 1123(a)(6) of the Bankruptcy Code restricts the contents of chapter 11 plans to appropriate provisions not inconsistent with the applicable provisions of [the Bankruptcy Code]. 17

26 Case: Document: 18 Date Filed: 11/15/2010 Page: 26 injunction in that case, Menard-Sanford is dramatically (one might fairly say diametrically ) different than this case because in that case: (i) (ii) the parties who were the beneficiaries of the injunction (the Debtor s insurers) had contributed the enormous sums of money to the trust res that all parties conceded was sufficient to fully satisfy all claims asserted against the Debtor, 880 F.2d at ; 11 the plan afforded all parties, including those with late-filed claims, a second chance to choose to be paid in full from the trust res, id. at 702; 12 (iii) the channeling injunction was critically required to prevent suits against third-parties whose contribution rights against the Debtor would defeat the prospects of a successful reorganization, id. at 702; 13 and 11 Thus, this Court described the channeling injunction as implementing the doctrine of marshalling of assets where creditors do not have the right to choose between two funds provided that they are paid in full from one of the funds. 880 F.2d at 701. By contrast, in this case, NHF asserts that Appellants do not have the right to be paid from NHF, and also seeks (via the release, exculpation and injunction provisions in NHF s Fourth Amended Plan) to prevent Appellants from pursuing the Houk family members for appropriate judicial relief. 12 In this case, NHF has expressly objected to the claim asserted by Anderson on the basis that it was filed four months after the chapter 11 bar date. See note 2, supra. 13 In contradistinction, this case involves a full payment plan with payment being made immediately following confirmation. Accordingly, continuation of NHF s operations is not necessary for a successful reorganization. Moreover, there is no evidence in the record to support a conclusion that the continued service of the Houk family members as directors and officers is necessary for NHF s continued operations. Finally, Ms. Ridgely expressly testified that no member of the Houk family had indicated that he or she would decline to serve as a director or officer of NHF following confirmation if not shielded by the release, exculpation and injunction provisions. 18

27 Case: Document: 18 Date Filed: 11/15/2010 Page: 27 (iv) the affected class of claimants voted overwhelmingly in favor of the proposed reorganization plan Decisions from Other Circuits. The decisions from other Circuit Courts of Appeals admonish the need for careful scrutiny when addressing non-debtor releases. For instance, the Second Circuit has observed that: (i) the only statutory authorization in the Bankruptcy Code for non-debtor releases is 11 U.S.C. 524(g) (limited to channeling injunctions in asbestos cases), and (ii) a nondebtor release is a device that lends itself to easy abuse. Deutsche Bank AG v. Metromedia Fiber Network, Inc. (In re Metromedia Fiber Network, Inc.), 416 F.3d 136, 142 (2 nd Cir. 2005). And in Alradigm Communications, Inc. v. FCC (In re Alradigm Communications, Inc.), 519 F.3d 640, 657 (7 th Cir. 2008), the Seventh Circuit denounced third-party releases that provide blanket immunity for both pre-petition and post-petition conduct and omissions (such as the one contained in NHF s Fourth Amended Plan in the case now before this Court). 14 See Stuart v. First Mount Vernon Indus. Loan Ass n., 3 Fed. Appx. 38, 42 (4 th Cir. 2001) (Menard-Sanford limited to situation where the affected creditor class has accepted the terms of the plan providing for such channeling injunction), citing Republic Supply Co. v. Shoaf, 815 F.2d 1046, 1050 (5 th Cir. 1987) (claimant bound by terms of reorganization plan confirmed without objection where no appeal taken). In the case before this Court, NHF s Fourth Amended Plan modified its Third Amended Plan to include a new class, Class 3C. This new class consists of contributors to DAFs and the plan describes them as unimpaired within the meaning of 11 U.S.C Thus, Appellants were barred from voting on NHF s Fourth Amended Plan. 11 U.S.C. 1126(f). Appellants timely objected to its confirmation, however. 19

28 Case: Document: 18 Date Filed: 11/15/2010 Page: 28 The decisions from other circuits that infrequently authorize non-debtor releases as part of confirmed plans are very carefully limited. Enjoining nonconsenting creditors claims is only appropriate in unusual circumstances. Class Five Nev. Claimants v. Dow Corning Corp. (In re Dow Corning Corp.), 280 F.3d 648, 658 (6th Cir.), cert. denied, 537 U.S. 816 (2002), citing Menard-Sanford, 880 F.2d at 702. Routine inclusion of non-debtor releases in reorganization plans is not appropriate. In re Transit Group, Inc., 286 Bankr. 811, 815 (Bankr. M.D.Fla. 2002)(citing Menard-Sanford as such an unusual case where third parties have provided large sums to pay claims). No case has tolerated non-debtor releases absent the finding of circumstances that may be characterized as unique. In re Metromedia Fiber Network, Inc., 416 F.3d at The Dow Corning Criteria. To determine if nondebtor releases are necessary and fair, many courts look to Dow Corning to examine whether each of the seven factors articulated by the Sixth Circuit are present. 280 F.3d at 658. See e.g., In re Mercedes Homes, Inc., 2009 Bankr. LEXIS 4265, **24-38 (Bankr. S.D. Fla. 2009); In re Berwick Black Cattle Co., 394 Bankr. 448, (Bankr. C.D. Ill. 2008); In re Original IFPC Shareholders, Inc., 317 Bankr. 738, 747 (Bankr. N.D. Ill. 2004). The seven factors set forth in Dow Corning are: (1) whether a suit against the non-debtor is, in essence, a suit against the debtor or will deplete the assets of the debtor; (2) whether the non- 20

29 Case: Document: 18 Date Filed: 11/15/2010 Page: 29 debtor has contributed substantial assets to the reorganization; (3) whether the injunction is essential to reorganization, namely, the reorganization hinges on the debtor being free from indirect suits against parties who would have indemnity or contribution claims against the debtor; (4) whether the impacted class, or classes have overwhelmingly voted to accept the plan; (5) whether the plan provides a mechanism to pay for all, or substantially all, of the class, or classes, affected by the injunction; (6) whether the plan provides an opportunity for those claimants who choose not to settle to recover in full; and (7) whether the bankruptcy court made a record of specific factual findings that support its conclusions. 280 F.3d at 658. And in this Circuit, it is well-established that the case for injunctive relief must be established by clear and convincing circumstances outweighing potential harm to the party against whom it is operative. A.H. Robins Co. v. Piccinin (A.H. Robins Co., Inc.), 784 F.2d 994, 1003 (4 th Cir. 1986); Land Stewards, L.C. v. Pleasants Inv. IV, Lt. Ptship. (In re Land Stewards, L.C.), 2002 Bankr. LEXIS 1748, * 9 (Bankr. E.D. Va. July 23, 2002). a. NHF Did Not Prove That Suit Will Deplete the Assets of the Debtor. The only proof offered at the confirmation hearing for the proposition that a suit against the Houk family will deplete assets of the Debtor was Ms. Ridgely s testimony that NHF s charter documents provide for 21

30 Case: Document: 18 Date Filed: 11/15/2010 Page: 30 indemnification by NHF of the Debtor s directors and officers. Jt. Appx. at However, on cross-examination Ms. Ridgely acknowledged that any indemnification obligation owed by NHF is limited by the Georgia Non-Profit Corporation Code, and that she does not know if Georgia law permits indemnification in respect of suits by DAF contributors. Jt. Appx. at Moreover, Ms. Ridgely further testified that under NHF s Fourth Amended Plan sufficient monies had been set aside to pay, in full, all Class 3C DAF contributor claims that may be eventually allowed. Jt. Appx. at It follows that any indemnification claims by the Houks against NHF will not deplete the bankruptcy estate beyond that which has already been provided for (and escrowed) under the terms of NHF s Fourth Amended Plan. 15 Cf. A.T. Massey Coal Co. v. Harman Dev. Corp. (In re Sovereign Coal Sales, Inc.), 2000 Bankr. LEXIS 2092, *26-27 (Bankr. W.D. Va. 2000) (non-derivative claims that have no detrimental effect upon assets of the estate should not be enjoined). b. The Non-Debtors Have Not Contributed Substantial Assets to the Reorganization. It is undisputed and evident from the terms of NHF s Fourth Amended Plan that the Houk family has not contributed any assets 15 Indeed, the Bankruptcy Court lacked subject matter jurisdiction to enjoin third party non-debtor claims that do not directly affect the res of the bankruptcy estate. In re Johns-Manville Corp. v. Chubb Indem. Ins. Co. (In re Johns-Manville Corp.), 517 F.3d 52, 66 (2 nd Cir. 2008), rev d on other grounds sub nom. Travelers Indem. Co. v. Bailey, 129 S.Ct (2009). 22

31 Case: Document: 18 Date Filed: 11/15/2010 Page: 31 (much less substantial assets ) in respect of NHF s reorganization. Jt. Appx. at 613. Further, even if the Houk family had contributed some value to the reorganization effort, a nondebtor release is not adequately supported by consideration simply because the nondebtor contributed something to the reorganization and the enjoined creditor took something out. Metromedia Fiber Network, Inc., 416 F.3d at 145. c. The Injunction is Not Essential to Reorganization. It is obvious that the challenged release, exculpation and injunction provisions are not essential to the reorganization. NHF s Fourth Amended Plan provides for full payment of claims upon the Effective Date of the Plan. Thus, continuation of NHF s operations is not necessary for a successful reorganization. Moreover, there is no evidence to the effect that the continued service of the Houk family members as directors and officers is necessary for NHF s continued operations. Finally, Ms. Ridgely expressly testified that no member of the Houk family had indicated that he or she would decline to serve as a director or officer of NHF unless shielded by the release, exculpation and injunction provisions. See In re Transit Group, 286 Bankr. at (third party releases of corporate officers rejected when plan proponent failed to demonstrate that any indemnification claims would jeopardize the debtor s reorganization). 23

32 Case: Document: 18 Date Filed: 11/15/2010 Page: 32 d. The Impacted Class Has Not Voted Overwhelmingly to Accept the Plan. As noted supra, NHF s Fourth Amended Plan places Appellants in a new class, Class 3C, and treats this class as unimpaired. Jt. Appx. at 624. Accordingly, Appellants and all other members of the class were denied any opportunity to vote on the Plan. e. The Plan Does Not Provide a Mechanism to Pay All Members of the Affected Class. NHF s Fourth Amended Plan specifically provides for a class of allowed claims (Class 3C) for those who established DAFs and transferred funds and properties to those DAFs. Jt. Appx. at 624. And although the Plan provides for payment of these claims in the event that they are allowed, NHF s Disclosure Statement advises that NHF will (and, in fact has) objected to all claims filed by contributors to DAFs. 16 Jt. Appx. at Accordingly, although there is a prospect for payment of claims by some of the contributors to DAFs, NHF simultaneously: (i) objects to allowance of all such claims (which would deny these claimants any right of recovery under the Plan), and (ii) seeks an unconditional release of the Houk family and an injunction barring the DAF contributors from pursuing these individuals in any other forum. 16 Consonant with its stated intent to object to all claims by contributors to DAFs, NHF has objected to all of the claims filed by Appellants here. See notes 2 and 3, supra. 24

33 Case: Document: 18 Date Filed: 11/15/2010 Page: 33 f. The Plan Does Not Provide an Opportunity for Those Claimants who Choose Not to Settle to Recover in Full. NHF s Fourth Amended Plan does not contain any settlement in exchange for a contribution to the Plan. Accordingly, the Plan does not provide any mechanism for those who choose not to settle to recover via any other avenue(s). g. Neither the District Court Nor the Bankruptcy Court Made a Record of Specific Findings to Support its Conclusions. The findings by the Bankruptcy Court in respect of the release, exculpation and indemnification provisions (Sections 7.19, 7.20 and 7.21 of the Debtor s Fourth Amended Plan) are found at Paragraph SS of the Confirmation Order submitted by Debtor s counsel. Jt. Appx. at This paragraph recites -- in wholly conclusory fashion -- that these provisions are within the Bankruptcy Court s jurisdiction, and are appropriate given the Debtor s unique circumstances, essential and integral to the plan, important to the overall objectives of the plan, and confer a material benefit on the estate. Id. But nowhere is found any explanation respecting why these determinations are appropriate, de rigueur or valid. To the contrary (as demonstrated above), these are bald conclusions that are contradicted by the record in the Bankruptcy Court. Moreover, these mere boilerplate recitations do not address the essential Dow Corning criteria. The District Court s Order affirming the Bankruptcy 25

34 Case: Document: 18 Date Filed: 11/15/2010 Page: 34 Court s confirmation of the Plan is equally vacant. Jt. Appx. at The District Court s Order is a one page Order that states, in wholly conclusory fashion, merely that the Bankruptcy Court s Confirmation Order is affirmed. Id. Like the Bankruptcy Court, the District Court simply failed to address the essential criteria set forth in Dow Corning. It follows that NHF failed to meet the clear and convincing circumstances burden of demonstrating that Sections 7.19, 7.20 and 7.21 of NHF s Fourth Amended Plan are warranted by virtue of a unique situation. Accordingly, the Bankruptcy Court erred in confirming NHF s Fourth Amended Plan, and the District Court erred in affirming. The District Court s Order affirming the confirmation of the Plan, and the Bankruptcy Court s Confirmation Order, must both be reversed. CONCLUSION For all of the foregoing reasons, Appellants respectfully urge this Court to reverse the Bankruptcy Court s Confirmation Order and the District Court s Order affirming. This Court should reverse and remand to the Bankruptcy Court with instructions that: (i) NHF s Fourth Amended Plan may be confirmed with the release, injunction and exculpation provisions (Sections and 7.21) excised, or (ii) confirmation of NHF s Fourth Amended Plan must be otherwise denied. 26